The Journal of Socio-Economics 38 (2009) 1–12

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The Journal of Socio-Economics

journal homepage: www.elsevier.com/locate/soceco

Institutions matter: The case of Vietnam

Thi Bich Tran a , R. Quentin Grafton a,∗ , Tom Kompas a,b
a
Crawford School of Economics and Government, The Australian National University, Australia
b
Australian Bureau of Agricultural and Resource Economics, Australia

a r t i c l e i n f o a b s t r a c t

Article history: The paper investigates institutional reforms in Vietnam and their impact on the economic performance
Received 30 November 2007 of firms. Using the provincial competitiveness index 2006 (PCI06) and firm-level data in Vietnam in 2005,
Received in revised form 16 April 2008 the results show that provincial competitiveness is economically and statistically significant in explain-
Accepted 8 May 2008
ing cross-province differences in firm performance. We find that a 1% point improvement in government
practice could increase the daily value-added of an average firm by an amount equivalent to nearly three
JEL classification:
times per capita GDP per day. The results show that an improvement in providing market information,
B25
more secure land tenure and labor training assistance has a positive effect on firm performance. By con-
B52
D02
trast, weaknesses in the judiciary system and administrative reforms impede growth of non-state firms.
D23 The findings indicate that governance is an important obstacle to the development of the non-state sector
N01 in Vietnam.
P26 © 2008 Elsevier Inc. All rights reserved.

Keywords:
Institution
Transition
Property rights
Non-state firm

1. Introduction
Institutional economics (North and Thomas, 1973; North, 1991)
emphasizes the effects of institutions on economic growth through
providing information, more secure property rights and strin-
gent enforcement mechanisms to stimulate cooperation. Empirical
investigations using cross-country-data have shown that better
institutions are accompanied by higher economic performance
(Hall and Jones, 1999; Acemoglu et al., 2001; Rodrik et al., 2002;
Grafton et al., 2007). Studies that have used micro- or national-level
data to analyze the effects of institutions on economic performance
are limited in number and scope and most have focused on ex-
communist economies where property rights have recently been
transferred from the state to individuals (Besley, 1995; Johnson et
al., 2002b).
The literature on the impact of institutions on economic perfor-
mance within countries has focused on enforcement issues and the
administrative quality of the public sector. Berkowitz and DeJong
(2003), for example, find that businesses are more likely to estab-
∗ Corresponding author at: J.G. Crawford Building (13), Ellery Crescent, Canberra
ACT 0200, Australia. Tel.: +61 2 6125 6558; fax: +61 2 6125 5570.
E-mail address: quentin.grafton@anu.edu.au (R.Q. Grafton).
lish themselves in regions that have more political support from
the local government in Russia, while Laeven and Woodruff (2004)
show that more effective jurisdictions are associated with larger
firms in Mexico. A critical survey of both theoretical and empirical
impacts of institutions on economic performance can be found in
Gagliardi (2007a).
In this paper we investigate institutional reforms in Vietnam
and the impact on firm economic performance using a provincial
competitiveness index for 2006 (PCI06), and firm-level data in Viet-
nam from 2005. A study of Vietnam is of particular interest because
although it has a homogenous political system and government
structure, and relatively equal government expenditures in differ-
ent parts of the country, economic performance is substantially
different across provinces (VNCI-VCCI, 2005). Compared to other
low-income countries, Vietnam is also characterized by a high level
of discretion by local government officials (Fforde and Vylder, 1996,
p. 260).
The paper is structured as follows. Section 2 investigates insti-
tutional reforms and their implementation in different regions of
Vietnam with a particular focus on the second phase of the Viet-
namese reform process that began in 2000. An overview of the
history and institutions in Vietnam is presented in Section 3 while
the data and variables used in our analysis are described in Sec-
tion 4. Section 5 presents the econometric model and results of

1053-5357/$ – see front matter © 2008 Elsevier Inc. All rights reserved.
doi:10.1016/j.socec.2008.05.012
2 T.B. Tran et al. / The Journal of Socio-Economics 38 (2009) 1–12
our investigations into institutional explanations for differences in
economic performance across Vietnam. Section 6 offers concluding
remarks.
2. Vietnam: institutional reforms and implementation
The economic reform process, called ‘Doi moi’ in Vietnam, has
recognized the legal existence of the non-state sector since the
beginning of the 1990s. Despite this legal landmark, the policy
environment remained hostile to private businesses in the 1990s.
Consequently, non-state firms faced many constraints to their
establishment and growth.
The Asian financial crisis in 1998 led to economic stagna-
tion and thus contributed to the second phase of Vietnamese
economic reforms. These stage two reforms have targeted the
sustained growth of the non-state sector and were supported by
the Enterprise Law of 1999. We investigate these institutional
reforms and their implementation and impacts on firm perfor-
mance through firm surveys. In this section, we focus on three
aspects of institutional performance: (i) provision of information;
(ii) security of private property rights; and (iii) lower transaction
costs that arise from reduced administrative procedures and less
discretion by state officials.
2.1. Providing information
Vietnam has been characterized by a lack of transparency and
a service sector to support business development (IMF, 2000). For
instance, the Economist Intelligence Unit’s report on Vietnam in
1997 observed that there were no business services (including
information provision) in any of its listed labor categories. A lack of
information was also shown through firm surveys. In 1998, a survey
on 153 firms in Vietnam conducted by Service-Growth Consultants
Inc. (Canada) and Thien Ngan (Galaxy) Co. Ltd. (Vietnam) showed an
increasing need for market information. One year later, in 1999, the
Mekong Project Development Facility (MPDF) conducted a survey
of 95 larger private manufacturers and found that a lack of mar-
ket information was the second most important constraint to firm
growth (Webster and Taussig, 1999, p. 30). Managers often com-
plained about their inability to find information on inputs, outputs,
alternative suppliers, buyers, price and price trend (Webster, 1999).
Moreover, information about changes in policies and regulations as
well as basic business registration such as firm name, address, and
other details were not available to public and responsible officials
(VNCI-CIEM, 2004).
The business environment has improved with the issuance
of the Enterprise Law (1999) that requires firms and business
registration bodies to publicize information relating to business
registration. However, due to incompatibility among government
bodies and the cost of publicizing information in newspapers, the
requirement has not been fully implemented and varies across
provinces. For example, Da Nang (a central province) and Ho
Chi Minh City have a website with basic firm information. These
cities also have established a commercial promotion center to
provide firms with market information. By contrast, the imple-
mentation of the Enterprise Law in other provinces is weak. In
some provinces government agencies continue to complain about
lack of information on firms and do not know the number of
non-state firms under their supervision (GTZ-CIEM-UNDP, 2004,
p. 17).
A lack of information persists as a major constraint to the
development of non-state firms. A survey of 1200 private enter-
prises in 2001 carried out by the German Agency for Technical
Cooperation (GTZ) and the Swiss Foundation for Technical Coop-
eration (Swisscontact), in collaboration with InvestConsult Group,
revealed a strong demand for information about a variety of
business topics (GTZ-Swisscontact, 2002). Another survey imple-
mented in 2001 on 414 private enterprises by MPDF indicated
that accessing market information and penetrating markets are the
biggest obstacles, followed by lack of capital (Nguyen et al., 2002,
p. 7).
Acknowledging difficulties facing non-state firms, the Viet-
namese Government issued Decree No. 90/2001/CP-ND in support
of the development of small and medium enterprises (SMEs)1 and
Decision No. 94/2002/QD-TTG to reform the mechanisms and poli-
cies to stimulate the development of the non-state sector. These
decisions led to the formation of the Agency for SME Development
(ASMED) in October 2002 that has as one of its key roles to provide
a countrywide firm information system on technology, manage-
ment, markets, promotion and government regulations related to
firm operation. To date, ASMED has worked well in undertaking
business registration and regulations. Its provision of market infor-
mation, however, remains weak and implementation varies across
provinces, depending on the attitude of local government officials
towards the non-state sector (Malesky, 2004).
To overcome the shortage of information and promote coop-
eration among firms, firms have established their own business
associations. In 2002, there were around 200 business associations
operating throughout the country (Nguyen et al., 2002, p. vii) and
the 2001 survey of MPDF shows that business associations per-
form well in providing information on policies and legal issues to
members. Unfortunately, only a few large and well-known business
associations provide, at a modest level, market information. For
instance, the Vietnam Chamber of Commerce and Industry (VCCI)
is equipped with an internet-based information system for SMEs,
which is transferred from GTZ (www.smenet.com.vn), and has set
up a center to promote cooperation among firms.
Business development services (BDS) have also been encour-
aged by the provincial and central governments. However, a survey
on 746 firms conducted in 2002 by Crawford School of Economics
and Government (CSEG) of the Australian National University
(CSEG) and Central Institute of Economic Management (CIEM) Of
Ministry of Planning and Investment Vitenam shows that firms
often complain about the quality of information that they have
bought. Consequently, many firms obtain their information infor-
mally through friends and relatives (Fig. 1). Firms in the survey also
consider that a lack of information on markets and customers weak-
ens their competitiveness, and express their high demand on this
type of information (CSEG and CIEM, 2002).
A recent survey conducted by the World Bank in 2004 of
42 enterprises that are contractors and subcontractors reveals
that lack of information is the most limiting constraint prevent-
ing cooperation. Searching for information about contractors and
subcontractors is time-consuming. Consequently, firms, especially
SMEs, have to rely on personal sources to advertise their prod-
ucts. Similarly, contractors find it hard to identify an appropriate
supplier due to a lack of basic data or items such as cata-
logues or brochures that also limit cooperation (Carlier and Tran,
2005).
In summary, institutional reforms since 2000 have improved
the provision of information relating to regulations. However,
weaknesses remain in providing market information and the imple-
mentation of the central government’s regulations and policies
varies across provinces.
1
SMEs in Vietnam are defined as having up to 300 workers.
 T.B. Tran et al. / The Journal of Socio-Economics 38 (2009) 1–12 3

Fig. 1. Proportion of sample firms using each kind of business service.

2.2. More secure property rights confiscated land. Moreover, there is no government body in charge
of confiscated non-used land and the publication of information on
In 2000, the IMF observed that Vietnam did not have secure pri- available land depends on local governments (Malesky, 2004).
vate property rights. Six years later, the Heritage Foundation 2007 The new Land Law 2003 may be a turning point for issues asso-
(Kane et al., 2007) gave a score of just 10% to Vietnam in terms of ciated with land tenure. As stipulated by this law, a subordinate
security of its property rights, whereas other measures of institu- system of Land Use Right Registration agencies is established to take
tional performance are rated above 50%. ‘Hot’ problems that are charge of LURC. This creates a ‘one-stop shop’, saving much money
related to private property rights, and often cited as impeding the and time for LURC applicants. Further, to increase land supply for
private sector performance in Vietnam, are land, contract enforce- the non-state sector, an agency called the Land Fund Development
ment and dispute resolution. Organization was created. Its function is to confiscate non-used
land previously allocated to SOEs and other organizations. Another
break-through of the new Land Law 2003 is that it tries to cre-
2.2.1. Land
ate a clear distinction between formal and informal land prices.2
According to the Constitution of Vietnam, land belongs to the
However, the implementation of this law, as in the case of provid-
state. The Land Law 1993, however, recognizes the right to use
ing market and other information, depends on practices of local
allocated land parcels. This law also allows holders to transfer and
government authorities (Carlier and Tran, 2004b).
mortgage the land use right (LUR) for a specific period (Section 2
– The Land Law 1993). However, because this law does not define
2.2.2. Contract enforcement and dispute resolution
clearly the functions of related government bodies, the implemen-
The Vietnamese government has carried out many institutional
tation of giving land use right certificates (LURC) is very weak. As
reforms to stimulate the development of the non-state sector, but
a result, many non-state firms have their own premises but do
reforms of the judiciary system have been often neglected. To date,
not have an LURC as collateral for loans. [For instance, according
the sole improvement in this area is the anti-corruption ‘voice’
to the firm survey in 2002 by CSEG and CIEM, among non-state
of the media towards the judiciary system. When weak contract
firms having their own premises, only 51.7% hold LURC]. This limits
enforcement has existed as part of ‘business culture’ (Doan, 1999),
the potential of firms to borrow and to grow their businesses (e.g.
the use of the courts to solve disputes is very low. For example, in a
Ronnas and Ramamurthy, 2001; Carlier and Tran, 2004a).
survey of 259 managers of non-state firms in Hanoi and Ho Chi Minh
A consequence of the planned economy and the Vietnam Con-
City in 1995–97,3 only 9% said that a court or other government
stitution is that all utilized land is allocated to individuals and
agencies could help to solve their disputes (McMillan and Woodruff,
state-owned enterprises (SOEs), and the procedure to apply for
1999). Although the incidence is much higher in the south than the
land for business purposes is both complicated and costly. Firms
north of Vietnam (Malesky, 2004), this proportion is much lower
incur substantial transaction costs by visiting many government
than in other transition economies (Johnson et al., 2002a).
agencies, paying a large amount in terms of informal fees and wait-
Weaknesses in the judiciary system and an attitude that liti-
ing for around 2–3 years for the final decision (Carlier and Tran,
gation may lead to a negative reputation encourages firms to rely
2004b). Due to a lack of premises, non-state firms have also to rent
on business associations to solve their disputes. Calculations based
un-utilized land from SOEs unofficially or from individuals, weak-
on the dataset of the CSEG and CIEM firm survey in 2002 shows
ening their competitiveness as the market rent is high compared
that only 7% of firms in the sample had disputes during the period
to the official price stipulated by the government. In addition, the
of 5 years. Once disputes arise, however, business associations are
contract term is often of short duration because landlords want
the most common method of resolution. The reasons for not using
to raise rents after short periods to ensure ‘catch up’ with a rising
courts include fears about the complications of lawsuits, the pos-
land price. As a result, non-state firms avoid investing in long-term
sibility of an unfair judge and possible damage of reputation with
assets on their rental premises (Carlier and Tran, 2004b). The net
business partners.
result is an increase in both transaction and transformation costs.
To increase the land supply for non-state firms, the govern-
ment issued the Land Law Amendment 1998 and the Domestic
2
Investment Promotion Amendment 1998. These promote the con- The formal price of land is the price that the state pays for confiscated land. This
is much lower than the market (informal) price, generating a huge benefit for those
struction of industrial zones and require provinces to publish who get LUR from the state and thus induces corruption in this area.
information on available land. However, constructing industrial 3
The survey was conducted with support of the Vietnam-Pacific Program and the
zones take time because it requires compensation to be paid for Academic Senate of the University of California, San Diego.
4 T.B. Tran et al. / The Journal of Socio-Economics 38 (2009) 1–12
Table 1
Distribution of contractors
1996 (%)
Non-state enterprise in same district/town 65.12
Non-state enterprise outside district/town 11.63
State enterprise in same district/town 8.14
State enterprise outside district/town 6.98
Foreign company 4.65
Other 3.49
Total 100.00
Source: Author’s calculation based on the dataset of MOLISA on SMEs.
A low level of business disputes is not necessarily a positive indi-
cation of economic development. Rather, it may reflect too much
prudence in selecting partners. The survey on non-state SMEs of the
Ministry of Labor, Invalids and Social Affairs (MOLISA) in 1996 and
2001 reveals that cooperation is mostly between non-state SMEs
and other domestic private enterprises in the same district/town.
Relationships outside of the regions and with SOEs are few, and
there is little cooperation with foreign companies (Table 1). More-
over, to get partners to enforce contract agreements, contractors
(large firms) often delay their payment until the next delivery. This
accumulates financial difficulties for smaller firms (subcontractors)
(Carlier and Tran, 2005).
2.3. Reducing administrative procedures and official arbitrariness
A significant change in business costs has arisen from the
issuance of the Enterprise Law 1999 in that many barriers prevent-
ing the establishment of firms have been reduced. Consequently,
the time it takes to establish an enterprise has been reduced from
90 to 7 days, on average. The registration fee has also decreased
from VND 10 million to VND 500 thousand. Also importantly, the
‘bureaucratic attitude’ has diminished thanks to a clearer defini-
tion of the functions of each government body (GTZ-CIEM-UNDP,
2004). The Land Law 2003 has also reduced administrative costs
in obtaining LURC. Business operations, thus, have become more
flexible and secure.
In other areas such as tax reform, unfortunately, red tape and
low transparency still remain as major obstacles to the establish-
ment and growth of private firms. In a survey of 300 firms carried
out by the MPDF and World Bank in Vietnam in 2002/2003, firms
often complain about the discretion and bureaucratic attitude of tax
officers. The fact that firms have to pay unofficial fees is common
because tax officers usually hide information, making the regula-
tion environment unclear (Carlier and Tran, 2004a).
Other problems also exist. For instance, legal documents in
Vietnam require all transactions to be proved by a ‘red invoice’4
that can be bought only at tax offices. Whenever firms come to
buy, tax officers sell only one book (containing 50 invoices). This
means firms have to come back in two weeks or a month to get
more. For some firms, visiting a tax office is costly. According to a
recent survey conducted by CIEM on 360 firms in 2007, on aver-
age, a firm has to spend 2000 h or 245 days per year, which is
equivalent to hiring one staff member to take charge of all tax
procedures, while completing the tax regulations only requires
about 30 days (http://www.dautuchungkhoan.com/Nganhang-
Taichinh/2007/08/23938.OTC). The issuance of the Tax Law in 2006,
which was enforced in July 2007, will help as firms are allowed to
calculate and pay taxes online. This is a major administrative reform
and creates a ‘one-stop shop’ in terms of business taxation.
4
This is the official invoice published by the Ministry of Finance. The name comes
from its color.
3. Institutional implementation: reasons for differences
2001 (%) The political system and government structures in Vietnam are
43.02
identical everywhere but the implementation of the central gov-
25.58 ernment’s laws and regulations varies across regions. In particular,
13.95 differences are more pronounced between the north and south of
11.63 the country. History, geography and the complexity of laws and
1.16
regulations are key factors explaining institutional variation.
4.65
100.00
3.1. History and geography
Vietnamese culture originated in the north and in the Red River
Delta (RRD) in particular. Early in its history, the RRD was char-
acterized by a high population density, almost all in rural areas
where there was poor infrastructure that limited communications
between districts and provinces (Gourou, 1936). The economy was
characterized by wet rice cultivation and village settlements. The
village was an autonomous community which collected taxes from
its citizens and fulfilled its obligations to the state. Tax obligations
of a village were levied on the number of its citizens. Because there
was no official birth and death registration system, coupled with the
difficult communication, chiefs of villages had incentives to hide the
number of new births from the government to keep a proportion of
collected taxes for their own benefit. The independence of villages
was manifested by the sayings ‘phép vua thua lê. làng’ – translated
as ‘the laws of the King yield to the customs of the village’.
The population of the RRD generated little surplus produc-
tion. Commercial markets were very small. Citizens produced most
of their need from food to housing materials, and were inclined
toward saving (Gourou, 1936). In summary, a high level of inde-
pendence of local governments, lack of transparency between local
and central governments, and self-sufficiency are the heritage of
the north.
The south, with its core area of the Mekong River Delta (MRD),
has been settled by people from the north and center of Vietnam
since the 17th century. The first migrants to the south from the
north and center were those who had lost, or could not find, a place
in the villages (Thach Phuong et al., 1992). Difficulties for the first
migrants stimulated a cooperative and audacious attitude among
these ‘pioneers’ (Son Nam, 2000).
The contrast between the RRD and MRD is documented by
Rambo (1973), Taylor (1983), Jamieson (1993) and Brocheux (1995).
As described in these studies, village organizations in the south
were much less rigid when compared to the closed political center
of villages in the north. Moreover, less diversity in the environment
reduced differences in locally adapted agricultural production and
the need for systems as in the north. Contrary to the ‘closed com-
munity’ in the north, southern people have also been characterized
as being open and less accepting of northern traditional norms.
They consume more and this substantial consumption difference
between the RRD and MRD remains true today, as shown in Table 2.
More predictable and benign weather in the MRD, coupled
with a convenient water transportation system, promoted faster
economic development in the south. The south also experi-
enced a greater western influence because the French exercised
direct control in the south first and later developed French rule
and administered indirectly the north, through local Vietnamese
administrators (Jamieson, 1993, p. 5). Moreover, 25 years of expo-
sure to the world market economy until 1975 has made southern
Vietnamese more market-minded.
Due to the complexity of law, and also to guide the imple-
mentation of laws, a large number of sublaws such as decrees,
decisions and regulations are issued. This, in turn, makes the reg-
ulatory environment more complicated, and the implementation
of laws depends very much on the interpretation of local officials
 T.B. Tran et al. / The Journal of Socio-Economics 38 (2009) 1–12 5

Table 2
Consumption per capita 1995–2005 (VNDa million/person)

Year Whole nation RRD North east North west North central coast South central coast Central highlands South east MRD

1995 1.66 1.37 0.72 0.63 0.87 1.70 0.67 4.22 1.54
1996 1.97 1.66 0.99 0.77 1.02 1.95 1.02 4.90 1.75
1997 2.15 1.76 1.08 0.71 1.14 2.20 1.16 5.22 2.00
1998 2.43 1.98 1.23 0.82 1.24 2.44 1.34 5.99 2.22
1999 2.59 2.17 1.19 0.85 1.32 2.62 1.58 6.25 2.39
2000 2.84 2.53 1.27 0.90 1.47 2.59 1.79 6.70 2.66
2001 3.12 2.74 1.72 1.01 1.59 3.07 1.85 7.14 2.86
2002 3.52 3.21 1.95 1.18 1.73 3.24 2.10 8.04 3.23
2003 4.13 3.75 2.25 1.24 1.97 3.96 2.31 9.44 3.79
2004 4.86 4.44 2.74 1.54 2.35 4.54 2.77 10.95 4.47
2005 5.78 5.31 3.18 2.01 2.75 5.31 3.38 12.94 5.36

Source: GSO (www.gso.gov.vn). Based on differences in geography, history and culture, and politics, Vietnam is divided into eight ecological regions: RRD includes 11 provinces
in the Red River area; north east contains 11 highland and mountainous provinces north east of Hanoi; north west includes four mountainous provinces north west of Hanoi.
North central coast includes six north coast provinces while south central coast includes six south coast provinces. Central highlands contains four highland provinces in the
central south. The south east includes Ho Chi Minh City and other developed provinces in the south, while the MRD contains 12 provinces.
a
The currency of Vietnam.

(Gillespie, 1993; Le et al., 1999; Webster, 1999; GTZ-CIEM-UNDP,
2004; Nguyen et al., 2004). Even when regulations are clear, there
are always opportunities for local authorities to apply their own
interpretation to central policies (Tenev et al., 2003).
In summary, history, differences in culture and geography, and
the complexity of laws, have led to a high level of discretion by local
authorities in the implementation of rules and decrees in Vietnam.
This is particularly true in the implementation of the central gov-
ernment’s regulations and policies towards the non-state sector.
An indicator that measures the attitude and the implementation of
laws and central government regulations and policies at a provin-
cial level, is the provincial competitiveness index (PCI). Details of
this indicator are discussed in the following section.
4. Data and variables
To analyze the impact of institutional changes on firm perfor-
mance since the second phase of reform in 2000, we combine the
use of the PCI in 2006 and countrywide firm-level data by province
in 2005.
The first PCI was calculated in 2005 (PCI05) for 42 provinces,
based on a firm survey and also on interviews with state officials in
2004. The PCI05 is a weighted index of nine sub-indices: business
entry costs; access to land; transparency and access to information;
time costs of regulatory compliance; informal charges; implemen-
tation and consistency of policies; state sector bias; pro-activity
of provincial leadership; and private sector development policies.
While each sub-index is scored from 1 to 10, the PCI is marked
from 1 to 100 with a higher score indicating better institutional
performance.
Following the success of the PCI05, the Vietnam Competi-
tiveness Initiative (VNCI) — a USAID (the United States Agency
for International Development) funded project, and the Vietnam
Chamber of Commerce and Industry (VCCI) repeated its study in
2006 based on the firm survey in 2005. Both PCI05 and PCI06
reflect the improvement of institutions at a provincial level since
the issuance of the Enterprise Law in 1999. Nevertheless, the results
from the PCI06 are considered more reliable for several reasons.
First, all 64 provinces of the country participated in 2005, thus
increasing the number of surveyed firms three-fold (6379 busi-
nesses versus 2020 firms in 2004). Second, two new sub-indices,
‘labor training’ and ‘legal institutions’, were introduced (VNCI-VCCI,
2006). The ‘labor training’ index assesses provincial assistance to
help overcome skilled labor shortages while the ‘legal institutions’
index reflects the generalized trust of private businesses in the
judiciary system to resolve disputes. Third, the methodology to
calculate sub-indices, assigned weight, and the aggregate PCI was
improved (VNCI-VCCI, 2006, p. 1).
Overall, the PCI reflects the arbitrariness, red tape and corrup-
tion of local government officials in the way they implement legal
documents and policies from the central government. As the PCI06
is more reliable in terms of statistics, most of the estimations in this
paper use the PCI06 and its sub-indices including ‘transparency and
access to information’, ‘private sector development services’, ‘land
access and security of tenure’, ‘legal institutions’, ‘business entry
costs’, ‘time costs of regulatory compliance’, and ‘labor training’
indices.
The firm survey was conducted by the General Statistics Office
(GSO) of Vietnam in 2005. Although this is the country-wide enter-
prise survey, information on costs is limited to the sample. As we
focus on the effect of institutions on non-state enterprise perfor-
mance, only the sub-sample of non-state manufacturing firms is
used in our analysis. In addition, the exclusion of missing and irrel-
evant values, including negative value-added (VA), visible outliers,
large firms that employ more than 2000 workers, and provinces
with a small numbers of enterprises, reduces the sample to 1727
observations.5 Summary statistics from the firm characteristics of
survey data are presented in Table 3.
Currently, the non-state sector in Vietnam includes household
firms, cooperative enterprises, sole proprietorships, partnership
enterprises, and limited and shareholding companies. However, the
survey conducted by the GSO only collects information on formally
registered firms. Thus, household enterprises are not included in
the survey and because there are only four partnership enterprises
included in the sample, we also exclude them from the analysis.
Column 1, Table 3 shows that the majority of non-state enter-
prises in the sample are limited companies, followed by sole
proprietorship firms. Firms at a small and medium size, using from
10 to 300 workers, dominate this sample. Most of the firms in the
sample were established at the time the reforms took place in 2000
(column 2). Other indicators including firm size, fixed asset and VA
show that large firms and advanced structures, including limited
and shareholding companies, have higher VA and fixed assets.
We model the effects of institutional differences by province
on firm labor productivity. To control for differences in firm spe-
cific characteristics, dummy variables for firm size, including micro,
5
In accordance with the current dominance of small and medium domestic pri-
vate firms in Vietnam, few firms (account for 0.8% of the sample) having more
than 2000 workers are excluded. Provinces having up to seven firms are also
excluded because these numbers of firms are too small to be representative for
those provinces.
6 T.B. Tran et al. / The Journal of Socio-Economics 38 (2009) 1–12

Table 3
Firm characteristics by ownership type and firm size

Firm ownership and % Of firms established Average firm age Average firm Average fixed asset Average value-added
size distribution (%) since 2000 (# years) size (# workers) (VND billion) (VND billion)
(1) (2) (3) (4) (5) (6)

Total 100.00 64.97 7.02 (6.84) 131.39 (229.37) 7054.76 (17599.19) 8060.82 (19816.66)

Firm ownership
• Cooperative 4.52 28.21 14.38 (13.24) 81.55 (153.24) 1661.33 (5611.86) 3400.04 (11581.84)
• Sole proprietorship 25.07 63.74 6.60 (4.09) 50.95 (107.89) 1846.67 (4256.89) 2963.97 (10299.78)
• Limited 55.18 69.25 5.67 (3.33) 142.54 (244.29) 7889.18 (18975.54) 7926.12 (18305.15)
• Shareholding 15.23 62.36 10.45 (12.39) 237.89 (283.48) 14205.28 (24199.47) 18322.59 (31622.33)

Firm size
• Micro 11.52 71.36 5.71 (4.29) 6.01 (2.09) 459.06 (557.45) 547.70 (2755.08)
• Small 42.04 71.07 6.15 (5.73) 24.25 (10.91) 1656.19 (3496.93) 2468.61 (9109.58)
• Medium 34.11 60.61 7.77 (7.71) 128.72 (70.20) 7987.35 (13270.39) 9631.12 (19195.41)
• Large 12.33 50.23 9.16 (8.72) 620.44 (346.29) 29038.84 (36912.01) 29798.58 (35251.00)

Source: Author’s calculation based on the countrywide firm survey 2004 (GSO). Note: numbers in parentheses are standard errors.

small, medium and large groups,6 firm age, capital intensity (as (1). Controlling for differences in firm characteristics, human capi-
measured as fixed assets per worker) and ownership types are tal and market size, we find the evidence that, overall, firms located
included. The economic environment that affects firm perfor- in the south perform better than those in the north (column 1 and
mance, such as the initial endowments of provinces including 2, Table 6).
human capital and market size, is included in the model as a control. The argument that the south used to be a market economy
Human capital is measured by the percentage of graduates in the and thus has more market-based experience than the northern
total population of each province using the 1999 population census bureaucracy-rooted economy is a reasonable working hypothesis.
data. Another way of measuring human capital is the proportion of However, Nguyen et al. (2004) argue that history is not an important
students enrolled in professional high school education as a propor- indicator as the reform process began some 15 years ago. Dur-
tion of the provincial total population in 2001. This variable reflects, ing that period the north approached western economies faster
to some extent, local needs for skilled workers. This information
is extracted from the standard statistical book for 64 provinces of Table 4
Vietnam (GSO, 2005). Market size is measured by the proportion Description of variables
of population of each province over the total population and per Variables Description
capita GDP. Per capita GDP is calculated as the average value for the
Log(lp) Log of labor productivity
period 2001–2004 [market size is included as a control because
K × L ratio Capital/labor ratio
a large market can support mass production and advanced tech- Firm age Number of years of operation
nologies (Rosenstein-Rodan, 1943; Murphy et al., 1989) that can Micro Dummy variable for micro firm
increase labor productivity (LP)]. The reason to take the economic Small Dummy variable for small firm
environment variables at the period that precedes the one stud- Medium Dummy variable for medium firm
Large Dummy variable for large firm – excluded from the model
ied is due to the lag in the impacts of local markets’ characteristics as a reference group
on firm performance. Table 4 provides a more detailed description Cooperative Dummy variable for cooperative firm
of variables used in the estimated models while Table 5 presents Private Dummy variable for private firm – excluded from the
summary statistics of the economic environment and institutional model as a base
Limited Dummy variable for limited companies
variables.
Shareholding Dummy variable for shareholding companies
edus01 Proportion of students enrolled in professional high school
5. Econometric model and results education as a proportion of the provincial total population
in 2001. This variable is extracted from the ‘Socio-economic
statistical data of 64 provinces and cities’ book
The model we estimate to analyse the impacts of institutions on
edu99 Percentage of graduates in the total population of each
firm performance in Vietnam is given by Eq. (1). province. This information is pulled out from the
Vietnamese population census in 1999
log(lpij ) = ˇ0 + ˇXi + ıZj +  + εij (1) GDPP Average per capita GDP during 2001–2004
% Of population Proportion of population of each province over the total
where lpij is labor productivity of firm i at province j; ˇ0 is firm spe-
population in 2005
cific effect; Xi is a vector of firm specific characteristics; Zj is a vector North Regional dummy variable
of the provincial initial endowment;  is a vector of institution PCI06 Provincial competitiveness index, 2006
variables; εij is the error term. Information 1 ‘Transparency and access to information’ index. This
reflects the level of access to the central government
As often cited in the literature, differences in history and culture
regulations and policies at the province level
are the reasons for differences in economic performance between Information 2 ‘Private sector development services’ index, revealing the
the north and south of Vietnam. Kim (2006) finds evidence of differ- availability of market information
ences in property rights between the north and south and attributes Land ‘Land access and security of tenure index’
it to differentials in social norms and politics. To test the hypothe- Dispute ‘Legal institutions’ index
Transaction cost Weighted index of ‘entry costs’ and ‘time costs of
sis that differences in history and culture affect firm performance,
regulatory compliance’ indices
a North dummy variable is used as a proxy for institutions in model Labor training ‘Labor training index’

Note: (i) Firm characteristics variables are based on the firm survey of GSO in 2005;
(ii) economic environment information including edus01, edu99, GDPP, % of pop-
6
By definition, micro firms employ less than 10 workers while large firms have ulation are at provincial level and can be accessed through GSO website; (iii) the
300 workers and above. institutional variables are at provincial level and provided by VNCI and VCCI, 2006.
 T.B. Tran et al. / The Journal of Socio-Economics 38 (2009) 1–12 7

Table 5 tively). Overall, southern provinces are often found in the northeast
Summary statistics of the economic environment and institutional variables
corner of each figure, indicating that southern provinces imple-
Variables Mean S.D. Min Max ment the central government regulations and policies better than
edus01 0.39 0.26 0.02 0.85
those in the north. The judiciary system is the worst performing
edu99 4.52 4.42 0.32 12.83 area as the majority of provinces are located under the horizontal
GDPP 7.30 4.55 2.08 34.99 line (Fig. 2e).
% Of population 3.32 2.31 0.68 7.11 To investigate the impact of institutional implementation on
PCI06 58.24 8.90 40.73 76.23
firm performance, we include PCI06 into model (1) and exclude
Information 1 6.26 1.16 3.62 8.50
Information 2 6.56 1.50 3.60 9.62 North to reduce multicollinearity. The effects of sub-indices are also
Land 5.54 0.93 4.19 7.98 investigated by additional specifications presented in Table 8. For
Dispute 3.89 0.78 2.52 6.38 instance, the effects of information provision on firm performance
Transaction cost 5.72 0.74 4.44 7.58
are examined in specifications 4 and 5 (Table 8). ‘Information 1’
Labor training 6.08 1.36 2.92 9.60
specification (column 4) presents the level of access to the central
Note: For the description of the variables see Table 4. government regulations and policies at the province level, while
‘Information 2’ specification (column 7) reflects the availability of
market information. Differences in property rights can be evalu-
than the south as more scholarships to study in western coun-
ated through an ‘access to land’ index (‘Land’ specification, column
tries were allocated to the north and returned scholars might bring
10) and disputes (column 13). Disputes are measured by the ‘legal
western working styles to the north. They also make a compari-
institutions’ index, which indicates the confidence of the private
son of economic performance among some provinces in the south
sector in the judiciary system to resolve their disputes. The possi-
with some in the north and conclude that differences in economic
ble impact of a lowering of transaction costs through simplifying
performance arise from differences in the implementation of legal
administrative procedures and reducing state officers’ arbitrariness
regulations and policies rather than history.
on firm performance is analyzed in ‘Transaction cost’ specifica-
We argue that history still matters and differences in history and
tion. This specification of institutional performance is constructed
culture define the way institutions are implemented. Our evidence
from ‘entry cost’ and ‘time costs of regulatory compliance’ indices,
is that when PCI06 is to (1) along with ‘North’ dummy variable then
respecting their weight in the PCI06. ‘Labor training’ presented in
the estimated coefficient for PCI06 becomes statistically insignif-
‘Labor training’ specification (column 19) does not reflect institu-
icant at the 10% level of significance from zero and the power of
tional reforms, rather it reflects the supporting attitude of local
the coefficient for North becomes smaller (column 4, Table 6). This
government to promoting the development of the non-state sector.
is because PCI06 is highly correlated with the north-south dummy
This index is included in the analysis because unskilled workers and
(Table 7) and it is likely that the dominant impact of social norms
managers may impede growth of non-state enterprises and thus
influences the power of the institutional variable.
government assistance in this area could be important (see Table 4
The relationship between the total PCI06 and its sub-indices
for the description of indices used in the estimated models).
with regions are also examined in Fig. 2 where each plotted dot
To check the robustness of variables included into various
reflects the province rank in implementing the central govern-
specifications, we use a software named PcGets — a general-to-
ment institutions and policies. The vertical line divides provinces
specific modeling approach in Hendry and Krolzig (2001). Once
into northern and southern regions where northern provinces are
a general unrestricted model (GUM) is formulated, the algorithm
located on the left of the line. The horizontal line goes through the
of the method checks outliers, defined by its number of  GUM
middle performing points and splits plotted points into lower and
unit. Impacts of these outliers on the dependant variable are
higher governance performers (below and above the line, respec-
neutralized by creating dummy variables for each outlier. In a
second stage, a multiple search path using Monte Carlo simula-
Table 6 tion is used to evaluate relevant variables to be retained in the
Impact of history and culture on firm performance simplified model. Principally, the multiple search path removes
Dependent variable: log(lp) insignificant variables from the GUM. After obtaining a specific
model, the significance of parameters in the final selected model
1: North only 2: North and PCI06
is evaluated in two over-lapping sub-samples (Owen, 2003). Reli-
Coefficient t-values Coefficient t-values ability statistics are reported. A higher reliability value indicates
(1) (2) (3) (4)
higher level of statistical significance of the selected variable in
Constant 2.822 21.68 2.836 9.70 both the full sample and sub-samples. These results are presented
K × L ratio 0.002 10.8 0.002 10.8
in Table 8.
Firm age 0.009 1.97 0.009 1.97
Micro −0.114 −0.91 −0.114 −0.91
As shown in Table 8, there is no heteroskedasticity in all
Small 0.090 0.91 0.089 0.91 models studied and the Chow tests at mid-point and 90th per-
Medium 0.135 1.40 0.135 1.40 centile breakpoints confirm the constancy of parameters. The
Cooperative −0.445 −2.92 −0.444 −2.91 results indicate that firm age has a positive effect on labor pro-
Limited 0.163 2.11 0.164 2.09
ductivity. One more year of operation makes firms more efficient
Shareholding 0.486 4.62 0.486 4.62
edus01 0.448 1.51 0.456 1.38 presumably due to the accumulation of skills and experience,
edu99 0.003 0.14 0.002 0.11 reflecting the ‘learning by doing’ process. Among different firm
GDPP 0.014 1.61 0.014 1.59 sizes, large groups are excluded from the model as a reference
% of population −0.008 −0.41 −0.008 −0.41
group. The Monte Carlo study retains only micro groups in the
North −0.290 −3.58 −0.294 −2.79
PCI06 −0.000 −0.05
specific models. Small and medium groups do not satisfy the sta-
# Of obsa 1727 1727 tistical significance of the ‘pre-search’ tests and thus, are excluded
F test (Prob) 18.98 17.62 from the models. This implies that statistical differences in firm
R2 0.13 0.13 performance are only found between micro and large groups.
a
Number of observations. Large group and private enterprises are excluded as Cooperatives perform less efficiently than sole-proprietorships
reference groups. (excluded from the model as a base) because they have disadvan-
8 T.B. Tran et al. / The Journal of Socio-Economics 38 (2009) 1–12

Table 7
Correlation matrix of all independent variables

K × L ratio Firm age Micro Small Medium Large Cooperative Private Limited Shareholding edusp01

K × L ratio 1.0000
Firm age 0.0151 1.0000
Micro 0.0376 −0.0692 1.0000
Small 0.0147 −0.1087 −0.3073 1.0000
Medium −0.0113 0.0784 −0.2596 −0.6127 1.0000
Large −0.0424 0.1172 −0.1354 −0.3194 −0.2698 1.0000
Cooperative −0.0676 0.2342 0.0001 0.0690 −0.0447 −0.0392 1.0000
Private −0.0570 −0.0356 0.2599 0.0974 −0.1569 −0.1723 −0.1258 1.0000
Limited 0.0638 −0.2202 −0.1488 0.0245 0.0491 0.0370 −0.2413 −0.6419 1.0000
Shareholding 0.0196 0.2124 −0.1075 −0.1912 0.1472 0.1792 −0.0922 −0.2452 −0.4703 1.0000
edusp01 −0.0244 0.0579 −0.1561 0.0814 0.0545 −0.0492 −0.0033 −0.2856 0.1626 0.1214 1.0000
edu99 −0.0023 0.0560 −0.1041 0.0648 0.0308 −0.0407 −0.0313 -0.3020 0.2097 0.0922 0.9100
GDPP 0.0654 −0.0304 −0.0320 0.0552 −0.0021 −0.0488 −0.1030 −0.1532 0.2022 −0.0356 0.3125
% Of popa 0.0676 −0.0070 −0.0322 0.0732 −0.0189 −0.0514 −0.0884 −0.2143 0.2325 −0.0122 0.3873
PCI06 0.0654 −0.0839 −0.0773 −0.0382 0.0525 0.0567 −0.0862 0.0025 0.1169 −0.1150 −0.0942
North −0.0806 0.1007 −0.1088 0.0642 0.0436 −0.0535 0.1387 −0.2365 0.0310 0.1623 0.4726

edu99 GDPP % Of pop* PCI06 North

edu99 1.0000
GDPP 0.4594 1.0000
% Of popa 0.5608 0.6198 1.0000
PCI06 −0.1405 0.2576 0.1125 1.0000
North 0.3605 −0.2361 −0.1505 −0.6200 1.0000
a
% of pop is the proportion of the provincial population over the total population in 2005.

Fig. 2. Plots of institution indicators across provinces.

tages in terms of capital and flexibility in making decisions, and holding companies are modern establishments with advanced
the scare experience of supportive institutions.7 Limited and share- technology and management skills, hence performing better than
sole-proprietorships.
The proportion of graduates over total population in 1999 has
7 the expected positive sign, at least in some cases (column 1 and
The literature has suggested that the economic performance of cooperatives
depends highly on the type of institutional context (see Gagliardi, 2007b for more 10, Table 8). The percentage of professional high school students
details). (edus01) has an insignificant impact on firm performance and is
 T.B. Tran et al. / The Journal of Socio-Economics 38 (2009) 1–12 9

Table 8
Reliability and coefficients of variables in the firm performance model

General model Specific model – dependent variable: log (labor productivity)

3: PCI06 4: Information 1 5: Information 2

Coefficient S.E. Reliable Coefficient S.E. Reliable Coefficient S.E. Reliable

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Constant 2.466*** 0.181 1.000 2.843*** 0.067 1.000 2.565*** 0.122 1.000
K × L ratio 0.002*** 0.000 1.000 0.002*** 0.000 1.000 0.002*** 0.000 1.000
Firm age 0.008** 0.004 1.000 0.008** 0.004 1.000 0.009** 0.004 1.000
Micro −0.177** 0.080 1.000 −0.194** 0.079 1.000 −0.168** 0.079 0.700
Small Exc† Exc† Exc†
Medium Exc† Exc† Exc†
Cooperative −0.602*** 0.130 1.000 −0.579*** 0.130 1.000 −0.615*** 0.130 1.000
Limited 0.173** 0.063 1.000 0.222*** 0.062 1.000 0.202*** 0.061 1.000
Shareholding 0.486*** 0.084 1.000 0.525*** 0.082 1.000 0.526*** 0.081 1.000
edus01 Exc† Exc† Exc†
edu99 0.017** 0.007 0.592 Exc† Exc†
GDPP 0.016*** 0.006 1.000 0.029*** 0.005 1.000 0.020*** 0.006 1.000
% of population Exc† Exc† Exc†
PCI06 0.007** 0.003 0.530
Information 1 Exc†
Information 2 0.053*** 0.017 0.499
Land
Dispute
Transaction cost
Labor training
Number of obs 1727 1727 1727
# Of outliers†† 52 51 52
Chow (864:1) 0.9260 0.9029 0.8973
Chow (1555:1) 0.6593 0.8827 0.6858
Hetero test (Prob) 0.5948 0.8460 0.8852

General model Specific model – Dependent variable: log (labor productivity)

6: Land 7: Dispute 8: Transaction cost 9: Labor training

Coefficient S.E. Reliable Coefficient S.E. Reliable Coefficient S.E. Reliable Coefficient S.E. Reliable
(10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21)

Constant 2.191*** 0.329 1.000 2.843*** 0.067 1.000 2.843*** 0.067 1.000 2.635*** 0.127 1.000
K × L ratio 0.002*** 0.000 1.000 0.002*** 0.000 1.000 0.002*** 0.000 1.000 0.002*** 0.000 1.000
Firm age 0.008** 0.004 1.000 0.008** 0.004 1.000 0.008** 0.004 1.000 0.009** 0.004 1.000
Micro −0.209*** 0.079 1.000 −0.194** 0.079 1.000 −0.194** 0.079 1.000 −0.185** 0.080 1.000
Small Exc† Exc† Exc† Exc†
Medium Exc† Exc† Exc† Exc†
Cooperative −0.581*** 0.131 1.000 −0.579*** 0.130 1.000 −0.579*** 0.130 1.000 −0.586*** 0.130 1.000
Limited 0.202** 0.064 1.000 0.222*** 0.062 1.000 0.222*** 0.062 1.000 0.212*** 0.062 1.000
Shareholding 0.504*** 0.084 1.000 0.525*** 0.082 1.000 0.525*** 0.082 1.000 0.519*** 0.082 1.000
edus01 Exc† Exc† Exc† Exc†
edu99 0.027*** 0.010 0.700 Exc† Exc† Exc†
GDPP 0.027*** 0.006 1.000 0.029*** 0.005 1.000 0.029*** 0.005 1.000 0.024*** 0.006 1.000
% Of population Exc† Exc† Exc†
PCI06
Information 1
Information 2
Land 0.102** 0.049 0.223
Dispute Exc†
Transaction cost Exc†
Labor training 0.040** 0.019 0.471
Number of obs 1727 1727 1727 1727
# Of outliers†† 52 51 51 51
Chow (864:1) 0.9260 0.9029 0.9029 0.9266
Chow (1555:1) 0.8860 0.8827 0.8827 0.8926
Hetero test (Prob) 0.6263 0.8460 0.8460 0.7482

Note: † Exc means the variable is not relevant and excluded from the model by the algorithm simulation. †† These outliers are detected by the algorithm method of PcGets. ***
and ** are significant at 1% and 5%, respectively.

excluded from the models by the general to specific modeling pro-
cedure. This may be because the number of students is not a good
indicator for human capital of provinces as a proportion of stu-
dents come from other provinces to study and later return to their
place of origin. In addition, this variable is highly correlated with
the ‘edus01’ (Table 4), and thus excluded from the model by the
Monte Carlo simulation. Per capita GDP also has the expected posi-
tive sign and the reliability of being included into the model of this
variable is 100%.
5.1. Institutional effects
The parameter of interest in Eq. (1), , reveals an interest-
ing aspect of the institutional reforms in Vietnam. As expected,
10 T.B. Tran et al. / The Journal of Socio-Economics 38 (2009) 1–12
Fig. 3. Rankings of observed and predicted mean LP on PCI06.
the overall institutional index PCI06 has a positive effect on firm
performance (column 1, Table 8). The result shows that after con-
trolling for differences in firm characteristics and provincial initial
endowments, a one percentage point improvement in government
practices increases firm LP by 0.7%. This is equivalent to an increase
in the value-added of the sample mean firm by VND 77,496.5 per
day that corresponds to a nearly three-fold increase in the Viet-
namese daily per capita GDP (VND 28,050.12) in 2005.8
‘Information 1’ specification (column 4, Table 8) reflects the
impacts of the transparency in government policies and regula-
tions on firm performance. Compared to the period before the
enterprise law (1999), the availability of regulatory information
has much improved with most provinces rated above the aver-
age level (Fig. 2b). However, improvements in this area merely
reduce troubles facing non-state firms in terms of acknowledging
the macro-economic environment, and thus cannot promote firm
performance. In fact, firms need market information to expand their
businesses. Although the improvement in providing market infor-
mation has been moderate, it has a positive effect on firm economic
performance as reflected in ‘Information 2’ specification (column 7,
Table 8). Provinces that have a one percentage point higher level
in providing firms with market information can increase firm LP
by 5.3%. This is much higher than the increase of LP due to the
improvement in the total PCI. The result supports the hypothesis
that market information is important to growth of non-state firms
in Vietnam.
Institutional reforms related to land issues have positive impacts
on firm performance. Results from ‘Land’ specification (column 10,
Table 8) show a big improvement in firm performance if the gov-
ernance level is better. For instance, if Hanoi — the region with
the highest human capital with per capita GDP almost twice that
of Soc Trang (a poor province in the south) — could improve its
implementation of land reforms by 3.79 points to catch up Soc
Trang, an average firm in Hanoi can increase its LP by 38.66%. This
is equivalent to an increase of VA of an average firm in Hanoi by
VND 37,603, or 1.34 times of the daily per capita GDP in 2005. The
result is, perhaps, a good answer for the puzzle posed in Nguyen et
al. (2004) ‘why southern provinces grow much faster than those in
the north’. However, it should be noted that the statistical reliability
of ‘land’ reported by PcGets is only 22.3%. That means this variable
is significant in the full sample, but not in both sub-samples in the
overlapping analysis.
8
The sample mean firm employs 131.35 workers and has a ln(lp) = 3.427. An
increase by 0.7% of labor productivity is equivalent to an increase of VND 590 per
day. On average, this increases the VA of the sample mean firm by VND 77,546.5,
nearly three times per capita GDP per day (VND 28,050.12).
Other aspects of institutional reforms including ‘dispute’ and
‘transaction cost’ have insignificant effects on firm performance
(‘dispute’ and ‘transaction cost’ specifications – columns 13 and 16,
Table 8), and hence are eliminated from the model by the multiple
search path of PcGets. The insignificant effect of ‘dispute’ can be
explained by no reform in this area. On the other hand, ‘transac-
tion cost’ measures the aggregate effect of diminishing time for
firm entry, land acquisition and bureaucratic compliance. Albeit
that entry cost has decreased significantly since the second phase
reform, this is still more costly than in other countries (Youth
Newspaper9 12 October 2006) and helps firms in the establishment
stage only. Furthermore, red tape and discretion of state officials
remain in many areas, causing difficulties for the operation of firms.
Government assistance in labor training has a positive impact on
firm LP (‘labor training’ specification – column 19). This positive
effect indicates that central and local governments have prescribed
a correct policy for a persistent problem of unskilled workers in
non-state firms. The findings imply that although all governance
areas need to be improved, a good reform strategy would be to focus
on good governance services, labor training and effective dispute
resolution.
To assess the economic significance of the effects of PCI06, we
also calculate the average of firm observed LP for each province and
graph the mean observed LP on PCI06. We also carry out a simple
simulation based on the ‘PCI06’ specification in Table 8. As all coef-
ficients in this specific model are significantly different from zero,
no variable is excluded from the simulation. The predicted log(lp)
is then transformed into levels. The mean of firm predicted LP is
computed for each province and graphed on PCI06 as well. If the
ranking of the mean of the observed and predicted LP on the PCI06
is different, the estimated coefficients are only statistically signif-
icant, not economically significant. Fig. 3 presents the rankings of
the mean observed and predicted LP of firms in each province.
As shown in Fig. 3, the pattern of the mean observed and pre-
dicted LP is not different. Overall, the average firm in provinces with
higher PCI06 has higher LP. We also categorize the predicted LP of
the average firm for each province into quartiles in ascending order
of PCI06. The average of predicted LP of the lowest and highest
quartile groups is computed. The ratio of these means is 1.18, indi-
cating that PCI06 is both economically and statistically significant
in explaining differences in firm performance. The findings imply
that in the short term, provinces can promote the sustainable devel-
opment of the non-state sector by more effective implementation
of central government reforms.
9
Translated from Vietnamese ‘Báo Thanh Niên’ ngày 12/10/2006.
 T.B. Tran et al. / The Journal of Socio-Economics 38 (2009) 1–12
6. Conclusion
The transition period in Vietnam has witnessed much effort
by the Vietnamese government in building institutions supporting
markets. These institutional reforms, especially since the second
phase in 2000, focus on the sustainable development of the non-
state sector. The reforms have significantly improved the provision
of regulatory information and, to some extent, market information.
Land tenure and entry costs have been also improved. However,
weaknesses remain in the judiciary system and administration
reforms to reduce government officials’ discretion.
The prominent feature of the institutional reforms in Vietnam is
the difference in the implementation of the central government’s
regulations and policies in various regions of the country. These
differences are more pronounced between the north and the south
and the causes for this institutional variation are history, geography
and the complexity of laws in Vietnam.
To examine the impact of institutional reforms on firm economic
performance, we use firm-level data in Vietnam in 2005 and the
provincial competitiveness index in 2006 (PCI06). The results indi-
cate that good governance practices, reflected by PCI06, are both
statistically and economically significant in explaining differences
in firm economic performance among provinces. Based on the esti-
mated model, we show that a one percentage point improvement in
government practices could increase the value-added of the sam-
ple mean firm by an amount equal to a nearly three times increase
in the Vietnamese daily per capita GDP.
The results indicate that an improvement of institutions in pro-
viding firms with market information, securing land tenure and
labor training assistance, positively increases firm labor productiv-
ity. The implications are that central and local governments should
implement policies to improve the quality of institutions that will
help non-state firms help overcome the persistent problems of a
lack of market information and land and skilled worker shortages.
The insignificant impact of transaction costs and dispute resolution
implies that attention should be paid to administrative reforms to
reduce government officials’ discretion and also the weakness of
the judiciary system.
Overall, the results show that governance is an important obsta-
cle to the development of the non-state business sector and that
institutions matter in terms of private firm economic performance
in Vietnam.
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